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What is a Letter of Intent  

The aim of this article is to provide the reader with a high level understanding of a letter of intent (“LOI”) and items to consider when reviewing and entering into such agreements.

A LOI is an agreement declaring the preliminary commitment of parties to do business. The agreement could for example outline the main terms of a prospective deal. LOI’s are particularly useful when two parties are initially brought together to hammer out the broad strokes of a deal before resolving the finer points of a deal or transaction. A LOI is commonly used in transactions regarding purchase of shares or assets in general to provide the parties with a foundation to continue negotiations in good faith. In Smoltek’s case, LOI’s may for example be used in the event of a negotiation with a tech company (the “Tech Company”) in order for Smoltek to offer the Tech Company access to Smoltek´s assets in some manner. 

EXCLUSIVITY

Considering that the target company is assumed to be the party offering the asset to one, or potentially, a number of interested companies, it should be noted that a letter of intent mainly is drafted in order to secure interests of the purchasing or interested company. The Tech Company may for example want to obtain exclusivity in order to prevent the counterparty from negotiating a deal with another tech company during an agreed time period. The time period for the exclusivity, and the consequences thereof, must be considered carefully and adapted to the commercial circumstances at hand. 

NON-BINDING

Even though the high level or sometimes quite detailed terms and conditions agreed to form the basis of the final agreement(s), as set out in a LOI, generally are non-binding, one should keep in mind that it will be difficult to propose terms and conditions deviating from what is set out in the LOI. Hence, the proposed terms should be carefully considered before accepted. However, it may also be that an interested part, due to assert due diligence findings or for other reasons will deviate from the terms and conditions proposed in the LOI, after having obtained exclusivity. To avoid such scenario, the target company should ensure to include a provision stipulating that if the terms and conditions proposed in the negotiations materially deviates from what is agreed in the LOI, the target company shall be entitled to terminate the exclusivity. Provisions that regulate non-disclosure, governing law and exclusivity are however usually binding for the parties in order to achieve a negotiating in good faith.  

Concluding the above, being a target company with limited resources one should consider if it is worth spending time and money on a sometimes lengthy process in order to get a letter of intent in place. It may be that it is more effective to start to negotiate the final agreement instead, being certain that binding terms and conditions are being negotiated and agreed upon. Such way forth may avoid granting exclusivity, i.e. being able to keep some pressure on an interested party as regards competition from other interested parties.

NON-DISCLOSURE

It is not unusual that the LOI includes a provision regarding non-disclosure, i.e. that certain information shared by the parties shall be covered by confidentiality. It is of importance to consider whether the LOI shall include a non-disclosure provision prior entry into a LOI. The handling of a non-disclosure undertaking is also heavily related to the handling of the EU's Market Abuse Regulation (MAR) as a listed company, such as Smoltek, as MAR may force the listed company to disclose information about the LOI if the content of the LOI is considered inside information. 

INSIDE INFORMATION

When considering entering into a LOI it is of importance to contemplate whether entering into the LOI will be considered as inside information. It is possible that the conclusion is that the LOI is of precise nature and likely to have significant effect on the price of the shares of the company.    

As regards inside information, it is not unlikely that the assessment when determining inside information differ between the parties in the LOI. For example a small listed company, a LOI of minor importance could be a game changer and thereby considered as inside information while the same LOI for a larger company may be a minor deal not considered as inside information.

If the LOI is considered as inside information, the rules in EU's Market Abuse Regulation (MAR) will apply. The main rule is that all inside information shall be disclosed to the market if the conditions of a postponed disclosure are not met. For further information on inside information and disclosure, please refer to our earlier newsletters.  

SUMMARY

As evident from above, a LOI intends to be the basis for a future or proposed agreement, where the LOI outlines the main terms of a prospective deal. A big plus in this context would be the opportuniyty to ensure at an early stage that the parties materially have the same view on important terms of a proposed deal. As always in connection with entering into agreements, there are both legal and commercial aspects to consider before the agreement is signed. However, by taking into account the aspects covered in this article, you may be one step closer to executing a good deal.

 

/MAQS law firm 2021-10-25 

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